Structured Settlement Protection Acts

Structured Settlement Protection Acts Exist

When an injured party settles a lawsuit against a responsible party, the injured party may receive a structured settlement consisting of periodic payments rather than a lump sum of money. Structured settlements provide a reliable source of funds without the need to manage large investments.

More than $6 billion is paid each year to fund new structured settlements in the United States, and more than $100 billion in total have been paid to fund settlements that are in force today, according to the Internal Revenue Service.

Unfortunately, those billions have created an attractive target for unscrupulous individuals who wish to engage in abusive practices against injured parties. These abusive practices can occur when holders of structured settlements seek to sell the rights to some or all of their future payments in order to obtain a larger infusion of cash than what the payments provide.

State and federal policymakers consider recipients of structured settlements to be a particularly vulnerable population in need of special legal protections because, in many instances, the recipients have been severely injured or are the children of people who were severely injured or killed due to the negligence of others.

As a result of the abusive practices, laws have evolved to protect structured settlement holders while still allowing for the sale of settlement payments when a legitimate need arises.

The sale of a structured settlement occurs when the recipient of a series of recurring payments (from a legal claim or injury) opts to sell them in exchange for a lump sum of money. This optionality can be beneficial for the seller, but regulation exists to ensure he or she is not taken advantage of by unscrupulous buy-side market participants.

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Expert

Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

Laws Balance Needs and Protections

State lawmakers have passed laws governing the sale of structured settlement payments to ensure a fair process and protect injured parties. These state laws have received the backing and encouragement of the federal government.

Structured Settlement Protection Acts, or SSPAs, enacted at the state level, are designed to allow the sale of structured settlement payments only when it’s in the best interest of structured settlement holders.

Illinois was the first state to implement a Structured Settlement Protection Act on Jan. 1, 1998, with Kentucky and Connecticut following suit.

In 2002, President George W. Bush signed the Victims of Terrorism Tax Relief Act of 2001, which included language protecting structured settlement holders who seek to sell the rights to their settlement payments.

Internal Revenue Code Section 5891, which implemented the protections, imposes a 40% tax on anyone who acquires settlement payment rights in a transaction that doesn’t qualify for an exemption.

To get an exemption, a payment sale must receive approval from a local court, which determines whether the sale complies with the relevant state’s SSPA.

Federal Law Endorses State Statutes 

The federal actions had the effect of ratifying the state laws already in force and prodding the remaining states to enact their own SSPAs to protect those who look to sell their structured settlement payments.

The District of Columbia approved its version of the law in 2018. In addition, several states, including Florida, Maryland and Virginia, have updated their laws in recent years to provide new protections.

New Hampshire became the final state to enact a Structured Settlement Protection Act when it signed its version into law in 2021.

SSPA Model

Many legislatures based their statutes on a model created by the National Council of Insurance Legislators.

Although the laws differ slightly from state to state, all SSPAs reflect the same fundamental legislative priorities:

• The factoring company purchasing the payments is required to disclose the difference between the value of the payments if the annuity contract is kept as-is versus the value if sold.
• The transfer of payments can only take place if the court approves.
• Approval is based on a judge’s findings that the transfer will serve the best interests of the person receiving the structured settlement payments, known as the payee, and/or any of his or her dependents.
• The court must find that the transfer is necessary to prevent undue financial hardship.
• The purchaser must supply the payee with a disclosure statement providing a summary of the terms of the transaction.
• Sellers have the right to cancel the sale if they change their minds within a “cooling-off” period.
• Sellers must prove to the court that all interested parties were given the opportunity to oppose, support or otherwise respond to the proposed transfer.
• The transfer of payments must not contradict any applicable federal or state statute or any court order, judgment or decree.

Beyond these basics, state laws do have differences. For example, some SSPAs require a settlement purchaser to merely recommend that a payee seek outside professional advice before entering into a transfer agreement, while other states make it mandatory that a payee seeks independent professional advice unless it is specifically waived by the payee.

Due to these differences in laws, as well as the varying workloads of court systems, the selling process for structured settlements is easier in some states than in others.

Laws for Individual States

Annuity.org provides the following list as an overview of the laws in individual states. For complete information, refer to the full text of your state’s Structured Settlement Protection Act.

Alabama

The seller must receive detailed financial and legal disclosures before transferring payment rights.

Alaska

The purchaser must disclose key terms to the seller. The seller must also receive independent professional advice regarding implications of the transfer. Beneficiaries of the structured settlement must be notified of the sale.

Arizona

The purchaser must advise the seller in writing to seek professional advice.

Arkansas

The law prevents payments from being split, which prevents the sale of partial payments.

California

The purchaser must advise the seller of their right to seek legal counsel in connection with a transfer petition and pay fees for the seller’s counsel up to $1,500, whether a transfer subsequently takes place. A copy of the transfer agreement must be filed with the California Office of the Attorney General. Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Colorado

The purchaser must advise the seller in writing to seek professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Connecticut

The purchaser must advise the seller in writing to seek professional advice.

Delaware

The seller must receive independent professional advice. Beneficiaries of the structured settlement must be notified of the sale.

District of Columbia

The purchaser must make certain disclosures before a transfer takes place, including disclosures of prior, attempted and denied transfers. A purchaser must also inform sellers of their rights.

Florida

Transfer petitions must be filed in the seller’s county of residence. The seller must receive independent professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed. The law was updated in 2016. Among several changes were requirements for the seller to appear in court in person unless there’s good cause not to, and specifications about which courts should hear applications to sell structured settlements.

Georgia

The seller has 21 days to cancel the sale. Beneficiaries of the structured settlement must be notified of the sale.

Hawaii

The purchaser must disclose key terms to the seller.

Idaho

The purchaser must advise the seller to seek professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Illinois

The purchaser must disclose the effective interest rate to the seller. The seller must attend the proposed transfer hearing in person, unless there is good cause not to. The reviewing court must be provided information about prior factoring transactions involving the same structured settlement. The purchaser must advise the seller to seek professional advice.

Indiana

Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Iowa

At least three days before the transfer agreement is signed, the seller must be informed of the amounts and due dates of the payments being sold, with these figures appearing in bolded font in a size no smaller than 14 points. The seller must also be informed of the aggregate amount of the settlement payments and the discounted present value of the payments. The seller must be given an itemized list of all transfer expenses, other than attorney fees, and the purchaser’s best estimate of the amount of fees and disbursements.

Kansas

Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Kentucky

The purchaser must disclose key terms to the seller. Transfers of structured settlements related to workers’ compensation benefits are not allowed. Beneficiaries of the structured settlement must be notified of the sale.

Louisiana

The seller must receive independent professional advice. The purchaser must provide a written disclosure with the terms of the financial transaction appearing in a font size no smaller than 14 points. Beneficiaries of the structured settlement must be notified of the sale.

Maine

The seller must receive independent professional advice. Interested parties must consent to the transfer if settlement documents prevent assignment of payments. Beneficiaries of the structured settlement must be notified of the sale.

Maryland

Factoring companies must register with the Attorney General’s office. The seller must receive independent professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed. The law was updated in 2016. Among other changes, the company purchasing the payments must tell the court if the underlying court settlement was from a claim involving cognitive impairment of the person selling the payments.

Massachusetts

The seller must receive independent professional advice.

Michigan

The seller must receive independent professional advice. Interested parties must consent to the transfer if settlement documents prevent assignment of payments. Discount or interest cannot exceed 25% per year. Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Minnesota

The seller must receive independent professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed. Beneficiaries of the structured settlement must be notified of the sale.

A new law in 2022 requires the appointment of an outside attorney to advise judges whenever someone with potential mental or cognitive impairments wants to sell a structured settlement. The law followed news reports of accident victims who were talked into selling their structured settlements for far less than what they were worth.

Mississippi

The purchasers must advise the seller in writing to seek professional advice.

Missouri

The court must find that payments made to the seller equal “the fair market value of the structured settlement rights being transferred.” Transfers of structured settlements related to workers’ compensation benefits are not allowed. Beneficiaries of the structured settlement must be notified of the sale.

Montana

Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Nebraska

Transfers of structured settlements related to workers’ compensation benefits are not allowed. The purchaser must notify the seller of their right to independent professional advice. Discount or finance charges cannot exceed the maximum interest rate for a consumer loan.

Nevada

The seller must be advised in writing to seek independent professional advice. The court considering the matter must be provided by the purchaser with disclosures, including an itemized list of expenses that the seller will be required to pay.

New Hampshire

New Hampshire was the final state to enact a Structured Settlement Protection Act, signing its version into law in 2021. The law states that both the obligor and annuity issuer are released from any liability over the redirected payments.

New Jersey

The purchaser must notify the seller of their right to independent professional advice.

New Mexico

At least three days before the transfer agreement is signed, the buyer or factoring company must disclose the aggregate amount of the payments, the discounted present value of the payments and the gross advance amount.

New York

The purchaser must notify the seller of their right to independent professional advice. The transfer agreement may not require the seller to pay any federal tax liability — other than the seller’s own tax liability — or the purchaser’s attorney fees or costs if a transfer is not completed. Transfers of structured settlements related to workers’ compensation benefits are not allowed. New York requires much of the contractual communication between secondary buyers and sellers to be done by the United States Postal Service and not by email, which can delay the process for residents of New York.

North Carolina

The seller must receive independent professional advice. Discount or interest rates cannot exceed prime plus 5%, and fees cannot exceed 2% of the net amount payable to the seller. Transfers of structured settlements related to workers’ compensation benefits are not allowed. Beneficiaries of the structured settlement must be notified of the sale.

North Dakota

A court may approve a transfer of payment rights without finding that the seller is experiencing a hardship. Willfully violating the North Dakota SSPA a second time is a class B misdemeanor, which makes it the only state to consider it a crime — as opposed to a civil infraction — to violate this law.

Ohio

The seller must receive independent professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Oklahoma

The purchaser must advise the seller in writing to seek professional advice.

Pennsylvania

The purchaser must advise the seller to seek professional advice or sign a waiver of advice.

Rhode Island

The purchaser must advise the seller to seek professional advice.

South Carolina

The purchaser must advise the seller in writing to seek professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed.

South Dakota

The purchaser must advise the seller to seek professional advice.

Tennessee

The purchaser must advise the seller to seek professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Texas

The purchaser must advise the seller in writing to seek professional advice.

Utah

The purchaser must advise the seller in writing to seek professional advice.

Vermont

The court that reviews a proposed factoring transaction must make several specific findings, including the need or purpose of the transfer of the payments and whether it is fair and reasonable, considering the discount rate used to calculate the advance and the fees and expenses imposed on the seller.

Virginia

Transfer petitions must be filed in the seller’s county of residence. The purchaser must advise the seller in writing to seek professional advice. The law was updated in 2016. The court must be notified of prior instances in which the payments were sold to the same party or an affiliate within four years and any prior denials within two years.

Washington

The purchaser must advise the seller in writing to seek professional advice.

West Virginia

The seller must wait 14 additional days before the sale can go through.

Wisconsin

Signed in 2015, the law in Wisconsin is based on a model legislation that requires certain disclosures to be made to the seller. The law requires that the interest rate be disclosed to the seller as if the sale were a loan. The seller must attend the proposed transfer hearing in person, unless the court decides that an audiovisual appearance is acceptable. A seller must provide an affidavit to the court disclosing if he or she is delinquent in any payments related to criminal charges or child support.

Wyoming

The factoring company must make disclosures to the seller that include the amounts and due dates of the payments being sold, the aggregate amount of the payments, the gross advance amount and an itemized list of all fees other than attorney fees.

Frequently Asked Questions About the Structured Settlement Protection Act